What is Loan-to-Value Ratio?
The Loan-to-Value ratio (LTV ratio) is a financial calculation used by lenders to evaluate the risk associated with a loan. It measures the loan amount against the appraised value of the property securing the loan, expressed as a percentage. The higher the LTV ratio, the riskier the loan is for the lender as the borrower is borrowing a larger proportion of the property's value. For example, if a borrower is buying a property worth Rs. 1 crore and applying for a loan of Rs. 75 lakhs, their LTV ratio would be 75%, meaning the lender is financing 75% of the property's value while the borrower is contributing 25% as a down payment.
How is Loan-to-Value Ratio Calculated?
To determine your LTV ratio, you can divide the loan amount by the appraised value of the property, and multiply by 100 to express it as a percentage. For instance, if you are purchasing a property worth Rs. 1 crore and applying for a loan of Rs. 75 lakhs, your LTV ratio would be 75%. Typically, lenders in India have a maximum LTV ratio they are willing to finance, ranging from 80% to 90% of the property's value. It is important to note that higher LTV ratios can lead to higher interest rates as lenders perceive them as a higher risk. You can use LTV calculator to calculate the same via easy method.
Why is Loan-to-Value Ratio Important for Borrowers?
The LTV ratio has a significant impact on the amount of money a borrower can obtain and the interest rate they must pay. In general, lenders in India are more willing to finance loans with lower LTV ratios as they are less risky. Consequently, borrowers with a higher LTV ratio may face difficulty getting approved for a loan or may have to pay a higher interest rate. For instance, if a borrower wants to purchase a property worth Rs. 1 crore and applies for a loan of Rs. 90 lakhs (an LTV ratio of 90%), they may have to pay a higher interest rate than if they had applied for a loan of Rs. 75 lakhs (an LTV ratio of 75%). This is because a higher LTV ratio increases the loan's risk for the lender, and they may charge a higher interest rate to offset the added risk.
How to Improve Your Loan-to-Value Ratio?
In case you intend to apply for a property loan in India, there are certain actions you can take to enhance your LTV ratio and improve the likelihood of being approved for the loan:
A simple way to increase your LTV ratio is by saving for a bigger down payment. By providing a larger sum of money initially, you can decrease the amount you need to borrow from the lender, thereby decreasing your LTV ratio.
Lenders consider your credit score when assessing your loan application. A higher score indicates lower risk, and lenders may finance a higher percentage of the property's value. To boost your score, pay bills on time, reduce debt, and maintain a reasonable credit utilization ratio.
Adding a co-borrower with a good credit score and income can be an option to enhance your LTV ratio and increase the likelihood of loan approval.
Comparing loan offers from different lenders is important to improve your LTV ratio as each lender has different requirements. This can help you find a lender who is willing to finance a higher percentage of the property's value, which can increase your LTV ratio.
To decrease your LTV ratio and decrease risk, you can consider applying for a smaller loan amount if you're having difficulty improving your LTV ratio.
Know more about LTV Ratio Here: Everything you need to about LTV Ratio
Conclusion
When applying for a property loan in India, the loan-to-value (LTV) ratio is important as it affects the amount you can borrow and interest rate. A higher LTV ratio increases the lender's risk. To improve your LTV ratio, save for a larger down payment, improve credit score, add a co-borrower, compare lenders, or apply for a smaller loan amount. This can increase the chances of loan approval and lower the interest rate.
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